“Economies prosper despite politics. Not because of it.”
The stock indices traded at a PE ratio of 12-13 during most of 2011-2013. This was a phase when the GDP growth was slowing down rapidly. The markets knew that earnings were bound to decelerate and the index valuations reflected this trend. The current valuation band is 14-15 times FY 15 earnings and investors are wondering where valuations will settle after the election outcome is known. A clear mandate will shift market focus onto the monsoon outlook & the nature of economic policies of the new regime. If the market perceives a reform driven rule, it is also likely to factor in the return of economic growth. A monsoon that delivers below expectations is likely to only remain a short term worry. The markets could well side-step the monsoon and start factoring in the return of economic growth. Optimism could well see the PE band rise to between 15 and 18 times. Investors must learn to live with higher valuations. A mixed election verdict will throw the markets temporarily out of gear. Valuations will return to the lower band of 12-13. Investors must prepare to adapt to either scenario.
Investment Strategy: Show patience. Volatility must not bother you.